I'm a dedicated advocate for the entrepreneur, and my mission is to write about growing a valuable business while keeping an eye on the exit. Over the years I’ve had the privilege of working with several hundred business owners in my capacities as a Certified Public Accountant and as a Certified Financial Planner®, advising them on matters related to taxes, accounting, finance, financial planning, and growth and exit strategies. Personally I have started, acquired, and sold several businesses. And like most entrepreneurs, I have made good decisions as well as some mistakes along the way. I enjoy sharing what I’ve learned in my Forbes.com blog and on my website ExitPromise.com. In my private practice, Enterprise Transitions, my calendar is full working side by side with business owners, helping them grow their businesses, solve problems, and plan for their successful exit.

WhatsApp $19B Secret Formula

For those entrepreneurs watching in bewilderment as one of their peers rakes in $19B by selling their mobile app to Mark Zuckerberg’s Facebook this week, I feel compelled to drill down on the numbers, key performance indicators, and intellectual property to discover this deal’s secret formula.

All of the normal computations associated with earnings, multiples, and key performance indicators (KPI) we teach entrepreneurs to focus on as they grow their businesses and build value, simply don’t work in this deal. The more I looked at the WhatsApp business model, the more I was convinced there was a secret formula in play.

Recurring Revenues Regardless of the business or industry, recurring revenues is the gold standard for creating business value. If a business can predict its revenue will repeat and increase over time, the multiple of revenue (or earnings) used to value the business increases.

In the case of WhatsApp, the mobile app was free for one year and then cost $.99 per user per year. With a reported 400 million users at the end of 2013, it’s reasonable to assume the company’s gross revenue would reach $400M in 2014. By anyone’s standards, not too shabby for a four year old company.

What appears to be magical for this startup is its exponential user adoption growth rate. In the latter part of 2013, the users were increasing by 25 million per month. In its marketplace, this startup clearly has struck an international vein of user adoption gold.

Revenue per Full-time Employee The revenue per full-time employee KPI is another way entrepreneurs and investors from Venture Capital and Private Equity Firms measure growth and the company’s management team performance. With 55 full time employees working at WhatsApp, the revenue per full-time employee is $7.27M. Simply stated, this KPI is way off the charts.

Employee Costs as a Percentage of Gross Revenue Internet-based and mobile app employee costs are closely linked to the costs of operating a software company because their overhead structure and business models are similar. In these industries, the employee costs as a percentage of gross revenue KPI is typically 60 to 65%.

When I did the math, based on estimated 2014 gross revenue of $400M, I concluded WhatsApp’s employee costs as a percentage of gross revenue is approximately 2%. This means WhatsApp’s business model is proving to be very profitable.

Less is More and Facebook Knows It Facebook’s founder Mark Zuckerberg knows his early adopters are finishing grad school and it’s their grandparents who are spending time on his social network. Moreover, gone are the days when everyone wants everyone to know everything about their personal lives. Less is more. And this mobile app, which allows only a select few to communicate privately, is the new, ‘cool’ digital darling. I’ll call this the secret sauce.

Standard Industry Multiples Don’t Work Purchase price multiples for a tech company typically range from 8-to-12 times EBITDA, possibly even a bit higher when all of the stars align properly. Unusual for any startup, WhatsApp has respectable revenues and the EBITDA to which to apply a purchase price multiple ! And when you do the math to back into the multiple paid, the $19B purchase price means Facebook paid WhatsApp’s founders a multiple of 47.5 against gross revenue.

It’s been reported that Mark Zuckerberg and WhatsApp founder Jan Koum negotiated the acquisition while they shared a box of chocolate covered strawberries. It’s just another interesting sidebar to this story as we wait to see if their secret formula as applied to revenues, user adoption rates, and employee utilization ultimately proves that their $19B math indeed works.

Learn more about Holly Magister, CPA, CFP at ExitPromise where she Helps Entrepreneurs Grow and Sell a Valuable Business. Follow Holly on Twitter or Google+

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